Cover Story, by Mark Robertson, Managing Partner
Posted on January 1st, 2006
Can investing really be this easy? The answer lies in greeting the investment challenge with eyes wide open and a willingness to accept that sometimes the simplest answers are the best.
In Chronicles of Narnia: The Lion, The Witch and The Wardrobe, 10-year-old and wide-eyed Lucy Pevensie discovers a magical world of adventure.
Can investing really be this easy? We recently received a letter from a charter subscriber sharing powerful pangs of guilt over her experience with Manifest Investing over the past year. Her results have been good — and the letter came following some portfolio pruning which led to a well-positioned portfolio for her future.
So what’s the problem? After years of conditioning that mountains of homework are part of investing, combined with blood, sweat and tears, she’s struggling with the seemingly easy and effective approach discovered here. I think it’s a common affliction. I hope so. I have it. Known by some as Occam’s Razor, the theory is that the best solution is often the simplest.
…thanks to you and my subscription… I’m cleaning out my investments closet! Call it spring cleaning or taking care of the garden, but my collections of investments are beginning to look fresh and organized. I wipe my white gloved finger around the outside of my dashboard and smile.
The words are at once daunting and haunting, “Can investing really be this easy?” If this answer is “Yes!” then why the feelings of guilt on my part?
Join the crowd and take a number. It’s something I’ve wondered about for a long time.
We’re conditioned by talking heads and lemmings that investing is too difficult for “average people” to understand. We’re battered to accept the myth that you and I can’t do this on our own.
But I think it runs deeper than that. It stems from a loss of innocence and a tempering of the joys of discovery as we become more and more “mature.”
It also serves to explain the box office success of movies like The Chronicles of Narnia. Narnia is a land of wonder and enchantment that exists beyond the back of a closet (or wardrobe.) We enlist the aid of four children to experience the adventure. There are villains and heroes and a world to be saved. Impossible things become reality because we allow ourselves to become “childish” again for two hours and 10 minutes.
It’s admittedly early, but my results were pretty strong during 2005. While discussing this with my spouse, explaining the idea behind MANIFEST quality and projected returns for the market, the response was, “Sounds like you’re speculating!”
I’m not sure if that makes your spouse the first “villain” in our story? (Grin) I suppose that tag could be applied to a lot of things in investing. The definition of speculating includes: meditation or reflection on a subject; engaging in a course of reasoning based on inconclusive evidence.
Let’s explore the foundation first. We know that success is possible in long-term investing. We know that understanding companies and owning them for extended (and profitable) periods is possible. We believe that quality matters as it relates to the probability of earnings growth. We also believe that earnings growth drive stock prices over the long term. “Sales drive earnings. Earnings drive stock prices.” Rinse. Repeat as necessary.
We have some short-term evidence. The Tin Cup model portfolio outperformed many stock market benchmarks during 2005. The monthly MANIFEST stock selections, taken as a portfolio, exceeded the Wilshire 5000 during 2005. The blue chip growth portfolio at www.stockfundas.com beat the market indices by a wide margin. The Challenge Club continued to outperform the stock market as a 7-year case study of club-style portfolio management. The mutual fund selections also outperformed the 2005 stock market.
The Tin Cup model portfolio has now outperformed the stock market in four of the last five years, implementing the MANIFEST methods. Very few things are absolute but this is starting to feel a lot less like speculation to me.
In Narnia: The Lion, The Witch and The Wardrobe, the Pevensie children discover a magical world when they leave the couch, filled with talking animals and an opportunity to fulfill a promising prophecy.
…so I watch the monthly stock screening results. I count on MANIFEST to help me become aware of some of the best opportunities to explore using Value Line. I trust that our goals and philosophies are similar. I perform cursory checks, including NAIC’s Stock Selection Guide, finance.yahoo.com, S&P company reports and the like…
So do I. You’ve described precisely how we manage our family investment account and my personal IRA. We’ve done it MANIFEST-style for over 10 years. The StockSearch feature saves a whole lot of time and our dashboards keep us all more aware.
I feel like advanced income statement analysis ought to be important — but it’s confusing — so I avoid that. I check inventory vs. receivables. I read comments from people that I trust. I check my portfolio for diversfication. Then… I pull the trigger.
I do feel like I’m speculating. It makes me feel guilty. I’m not analyzing things as thoroughly as other people seem to. I don’t call investor relations and quiz them. I’m not calculating R-squared. IS IT REALLY THIS EASY??? WHY DO I FEEL LIKE I’M NOT DOING MY HOMEWORK? I’ll be lying on my couch with a cold compress on my forehead awaiting your words of wisdom.
First, leave the couch behind. You’re OK. Second, fundamental income statement analysis is important. That’s why we’ve included the Fundamental Forecasts feature for stock analysis. Third, although I’ve performed literally thousands of stock studies, I can count on one or two hands the number of times I’ve really had to explore balance sheets in great detail (including any inventory analysis) and I have never called investor relations or calculated an R-squared.
Despite what some lemming or well-meaning investing enthusiast may believe, few of these things are of primary or first-order importance. What is important?
(1) Growth matters. Top-line growth is where any investment analysis probably needs to begin. What does the company do or make? How will they capture the next customer? How well does the company recognize and seize opportunities for growth?
(2) Profit matters. How profitable is the company? How profitable do you think the company will be in the future?
(3) Value matters. How do these characteristics of growth and profitability compare amongst their competitors? Based on that, what price levels seem reasonable to expect in the future? At that price, what will the return-on-investment be?
Based on the Tin Cup experience, another mystery that keeps investors couch-ridden seems to crystallize: the decision-making of selling and guiding a portfolio. Only 38 stocks have been sold during the 11-year Tin Cup case study and the conditions triggering the sales are as clear and clarion as a Narnian lamp post.
In its simplest form, Occam’s Razor is a logical principle that the simplest solution is the best one. Use no more assumptions than the minimum that is needed. Why are the simplest solutions so challenging to accept? Why do we convince ourselves that suffering is deep-rooted in the investing experience?
I blame maturity and humility. Childish curiosity enables discovery and for many, faith delivers answers to powerful and healthy skepticism. I think the answer lies in greeting the investment challenge with eyes wide open and a willingness to accept that sometimes the simplest answers are the best. Go ahead, boldly escape the couch and be childish.